ECON: Patterns in the Dark

From: J. R. Molloy (
Date: Tue Jan 04 2000 - 18:28:16 MST

by Richard M. Ebeling

Patterns in the Dark: Understanding Risk and Financial Crisis with
Complexity Theory by Edgar E. Peters (New York: John Wiley & Sons, 1999);
222 pages; $39.95.

In the 1920s, 1930s, and 1940s, the Austrian school of economics was
considered one of the leading contributors to both economic theory and
economic policy. The Austrian economists challenged the premises and
arguments of the socialists, interventionists, and inflationists of their
day. They offered an insightful conception of the free-market economy as a
dynamic competitive process that coordinated the actions and activities of
multitudes of individuals without central direction. They emphasized the
role and importance of the entrepreneur for bringing the forces of supply
and demand into balance and generating creativity and innovation throughout
the market. And they refined Adam Smith's "invisible hand" argument that a
market economy, securely based on individual freedom, private property,
voluntary agreement, and rule of law, had the ability to create a
self-generating "spontaneous order" without any political command or

During the 25 years after the Second World War, the Austrian contributions
were in eclipse owing to the rise and domination of Keynesian economics and
of a neoclassical, mainstream economics steeped in the idea of mathematical
models for determining the general equilibrium solutions to a complex
economic system. The Austrian eclipse was reinforced by the ideological
triumph of those who hoped to discover the quantitative methods for planning
and manipulating an economy into desired directions through mathematical and
statistical techniques.

Beginning in the 1970s, the theoretical and factual premises of Keynesian
economics were increasingly challenged by a growing number of economists.
And mathematical economics has slowly come to be seen as a dead end that
neither significantly adds to our knowledge about the workings of an
interdependent, complex economic order nor offers a key for predicting
future changes in the market.

The revival of Austrian economics has received support from unexpected
directions in recent years. One of these has come from what is known as
"complexity theory." For example, William A. Sherden, in his book The
Fortune Sellers: The Big Business of Buying and Selling Prediction (1998),

"Complexity refers to the phenomenon of order emerging from the complex
interactions among the components of a system influenced by one or more
simple guiding principles. Structures such as an economy emerge out of what
would otherwise be anarchy by a process of "self-organization." Complex
systems organize themselves without some form of internal control.... The
discovery of self-organization could be attributed to eighteenth-century
British economist Adam Smith. Smith reasoned that this "complex stew" of
interactions among individuals and businesses pursuing their self-interest
would create a functioning economy all by itself, with no one in charge."

Investment strategist Edgar E. Peters makes the subject of complexity
theory, Austrian economics, and the market process the central theme of his
new book, Patterns in the Dark. As Peters points out, "The Austrians believe
that individuals working in their own self-interest will spontaneously
self-organize when there is an overlap in goals and knowledge. There is, in
fact, a direct correspondence between many concepts developed by the
Austrians and those of complexity theory."

Peters goes on to explain.

"What makes a social system complex is a loose coupling between individual
participants and an increase in the number of possible paths of
development.... Complex systems are characterized by global structure and
local randomness. The global structure maintains the strength of the whole.
The local randomness creates innovation and resilience. In free-market
economies, competition is the source of local randomness, and regulation
maintains the global structure."

What does Peters mean by "regulation"? He generally means the institutional
"rules of the game" within which individuals freely interact and compete
with each other: private property, rule of law, enforcement and respect for
contract, and individual rights as a basis for freedom.

And what makes a complex social system and a free-market order
"unpredictable," he argues, is that there is no way to know all the possible
ways individuals will adapt to changing circumstances and how entrepreneurs
will creatively imagine new and original ways to react to their competitors
or initiate new methods and lines of production. Without such real and
radical uncertainty, not open to probabilistic risk analysis, the market
economy would not have its large degree of adjustability and adaptability to
minor and major shifts in opportunities and conditions. Therefore, a market
economy evolves and changes through time in ways that makes its future
development fundamentally unpredictable. Peters says,

"A free-market economy promotes the trade of goods and services among
participants who seek to increase their wealth. The goal of a complex system
is not a static "equilibrium." It is, instead, a dynamic and evolving state
that is ever changing, ever creative, but ever stable. The details as to how
it achieves this state are never constant. Because a complex system does not
need a specific sequence of events to achieve its goal of a stable state, it
is resilient despite unexpected changes in its environment, and its
creativity adapts."



--J. R. Molloy

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